<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER
333-34729
---------
LINC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0850149
(State of incorporation) (I.R.S. Employer Identification No.)
303 E. WACKER DRIVE
Chicago, Illinois 60601
(Address of principal executive offices)
(312) 946-1000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes [x ] No []
The number of shares outstanding of the registrant's .001 par value Common Stock
at November 19, 1997 was 5,133,696.
1
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PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Operations -- Three months and nine months ended
September 30, 1996 and 1997 (unaudited).................................................... 3
Consolidated Balance Sheets-- December 31, 1996 and September 30, 1997 (unaudited)........ 4
Consolidated Statements of Cash Flows -- Nine months ended September 30, 1996
and 1997 (unaudited)....................................................................... 5
Notes to Consolidated Financial Statements................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................. 10
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION................................................................. 15
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K.................................................... 16
SIGNATURES................................................................................. 17
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Net revenues:
Sales of equipment $ 5,017 5,900 14,979 16,152
Cost of equipment sold 3,910 4,791 11,898 13,013
- --------------------------------------------------------------------------------------------------------------
Gross profit from sales of equipment 1,107 1,109 3,081 3,139
Rental and operating lease revenue 1,587 1,870 5,390 5,034
Direct finance lease income 808 1,728 2,097 4,326
Fee income 441 166 1,571 814
Gain on remarketing of leased equipment 12 120 25 397
Gain on equity participation rights 45 20 45 117
Interest and other income 418 473 768 1,252
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Net revenues 4,418 5,486 12,977 15,079
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Expenses:
Selling, general and administrative 1,967 2,233 5,684 6,196
Interest 746 1,188 2,050 3,032
Depreciation of equipment under rental
agreements and operating leases 888 1,022 2,780 2,880
Provision for credit losses 138 230 476 709
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Total expenses 3,739 4,673 10,990 12,817
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Income from continuing operations before income taxes and
minority interest 679 813 1,987 2,262
Income tax expense 259 333 791 867
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Income from continuing operations before minority interest 420 480 1,196 1,395
Minority interest (58) - (97) (13)
- --------------------------------------------------------------------------------------------------------------
Net income from continuing operations $ 362 480 1,099 1,382
Discontinued operations
(Loss) from discontinued operations, net of income tax
(benefit) in the three months ended September, 1996
and 1997 and nine months ended September, 1996 and
1997 of $(146), $(222), $(647), and $(206),
respectively (229) (347) (1,012) (402)
Net gain (loss) of disposal of discontinued operations,
net of income taxes in the three months ended
September 1996, and the nine months ended September
1996 of $(157) and $967, respectively (245) - 1,513 -
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ (112) 133 1,600 980
==============================================================================================================
Net income from continuing operations per common share 0.10 0.14 0.31 0.40
Net income (loss) per common share (0.03) 0.04 0.45 0.28
Shares used in computing net income per common share 3,538,119 3,475,712 3,562,579 3,462,217
</TABLE>
See accompanying notes to consolidated financial statements.
3
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LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
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December 31, September 30,
1996 1997
Assets (Audited) (Unaudited)
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<S> <C> <C>
Net investment in direct finance leases $31,763 48,656
Equipment held for rental and operating leases, net 15,048 20,366
Accounts and notes receivable 8,235 10,875
Net assets of discontinued operations 6,470 3,925
Other assets 3,523 5,443
Deferred income taxes 1,310 700
Goodwill 851 1,918
Cash and cash equivalents - -
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Total assets $67,200 91,883
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Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------
Senior credit facility and other senior notes payable 29,605 44,381
Recourse debt 3,361 3,479
Nonrecourse debt 8,276 17,349
Accounts payable 4,355 3,403
Accrued expenses and customer deposits 2,534 2,538
Subordinated debentures 5,127 5,317
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Total liabilities 53,258 76,467
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Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 authorized; none
outstanding - -
Common stock, $.001 par value, 15,000,000 shares authorized; 3 3
3,012,757 and 3,391,442 shares issued;
2,950,758 and 3,334,909 shares outstanding
Additional paid-in capital 978 1,887
Deferred compensation from issuance of options - (196)
Stock note receivable - (511)
Treasury stock, at cost; 61,999 and 65,903 shares (270) (287)
Unrealized gain on securities 348 657
Retained earnings 12,883 13,863
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Total stockholders' equity 13,942 15,416
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Total liabilities and stockholders' equity $67,200 91,883
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See accompanying notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
LINC Capital, Inc and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
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Nine Months Ended
September 30,
1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,600 980
Adjustments to reconcile net income to
net cash provided by continuing operations:
Net income (loss) from discontinued operations (501) 402
Depreciation and amortization 3,215 3,213
Direct finance lease income (2,097) (4,326)
Payments on direct finance leases 12,021 17,461
Deferred income taxes 791 660
Provision for credit losses 476 709
Amortization of discount 116 237
Minority interest 97 202
Changes in assets and liabilities:
Decrease (increase) in receivable (6,205) (2,567)
Decrease (increase) in other assets 848 (2,593)
Increase (decrease) in accounts payable 3,796 (952)
Increase (decrease) in accrued expenses
and customer deposits 1,235 (9)
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Cash provided by continuing operations 15,392 13,417
Cash flow from discontinued opeations 11,654 12,354
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Cash provided by operating activities 27,046 25,771
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Cash flows from investing activities:
Cost of equipment acquired for lease (19,937) (37,870)
Fixed assets purchased (226) (780)
Proceeds from disposal of discontinued operations 8,327 -
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Net cash used in investing activities (11,836) (38,650)
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Cash flows from financing activities:
Net increase in notes payable 2,350 14,776
Proceeds from recourse and nonrecourse debt - 12,069
Repayment of recourse and nonrecourse debt (1,703) (2,878)
Purchase of stock (265) (17)
Sale of stock 241 127
Common stock dividends (770) -
Proceeds from notes from discontinued operations 2,903 -
Payment of notes from discontinued operations (15,987) (11,198)
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Net cash provided by (used in) financing activities (13,231) 12,879
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Net increase in cash 1,979 -
Cash at beginning of period 1,668 -
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Cash at end of period $ 3,647 -
================================================================================
Supplemental disclosures of cash flow information:
Interest paid $ 2,280 3,141
Income taxes paid 270 70
================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
5
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LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(1) The Company
LINC Capital, Inc. (the "Company") is a finance company specializing in the
origination, acquisition, securitization and servicing of equipment leases and
in the rental, lease and distribution of analytical instruments. The Company's
principal businesses are (i) the direct origination of leases to emerging growth
companies primarily serving the healthcare and information technology industries
("Select Growth Leasing" activities) and (ii) the rental, leasing and
distribution of analytical instruments to companies serving the environmental,
pharmaceutical and biotechnology industries ("Instrument Rental and
Distribution" activities). In October 1997 the Company reinitiated the business
of acquiring, financing and servicing equipment lease and loan portfolios
originated by other lessors ("Portfolio Finance & Lessor Acquisition"
activities), following expiration of a non-compete agreement entered into in
connection with the sale of certain of its businesses to an unrelated party in
September 1994.
In June 1997, the Company adopted a plan to transfer certain assets and related
liabilities not used in the Company's continuing businesses and the preferred
stock issued by the Company's subsidiary, LINC Quantum Analytics, Inc. (the
"Subsidiary Preferred Stock") to its wholly owned subsidiary, LINC Finance
Corporation.
On November 12, 1997 following the above transfers, pursuant to the plan adopted
by the Company and immediately following the receipt of the proceeds of the
Company's initial public offering described below, the stock of LINC Finance
Corporation was distributed to certain of the Company's shareholders in
redemption of 482,792 shares of the Common Stock of the Company. In connection
with such distribution (i) LINC Finance Corporation agreed to pay the Company an
aggregate of $2,508,000 until the maturity of the Company's 8 1/4% Subordinated
Debentures due 2003 (the principal balance of such Debentures shown in the
Company's financial statements herein is net of such amount); (ii) LINC Finance
Corporation repaid advances from the Company of $2,012,000 and (iii) the Company
caused the Subsidiary Preferred Stock, all of which was held by LINC Finance
Corporation to be redeemed.
The results of LINC Finance Corporation and certain related businesses,
including those related to businesses disposed of in prior years, have been
classified as discontinued operations in the accompanying financial statements.
Revenues of such discontinued operations for the nine months ended September 30,
1996 and September 30, 1997 were $19.1 million and $6.7 million, respectively.
On November 12, 1997, the Company consummated its initial public offering of
Common Stock through the sale of 2,000,000 shares of Common Stock (the
"Offering"). On November 19, 1997, the underwriters of the Company's offering
exercised their over allotment option and purchased an additional 300,000 shares
of Common Stock of the Company. The Company received net proceeds of
approximately $27.2 million from the Offering and the exercise of the
underwriters' over allotment option related thereto.
(2) Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. Accordingly, the interim statements do not include all of the
information and disclosures required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Inter-company accounts and
transactions have been eliminated. These financial statements and related notes
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Registration Statement on Form S-1
(Registration No. 333-34729). The results for the three months and nine months
ended September 30, 1997
6
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periods are not necessarily indicative of the results to be expected for the
entire year ending December 31, 1997.
Earnings Per Share
Earnings per share amounts are calculated based on the net income (loss) divided
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents consist of
options. As required by Staff Accounting Bulletin No. 83 issued by the
Securities and Exchange Commission, common and common equivalent shares issued
by the Company during the twelve-month period preceding the initial filing of
the Company's Registration Statement have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock method
and assuming the initial public offering price).
The weighted average number of shares of common stock and common stock
equivalents outstanding used for computing earnings or loss per share was
3,538,119 and 3,475,712, during the quarters ended September 30, 1996 and 1997,
respectively, and 3,562,579 and 3,462,217 during the nine months ended September
30, 1996 and 1997, respectively. Primary and fully diluted earnings per share
are the same for each period presented.
(3) Net Investment in Direct Finance Leases
Net investment in direct finance leases is as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
December 31, September 30,
1996 1997
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lease contracts receivable in installments $ 37,501 56,151
Estimated residual value of leased equipment 2,376 5,016
Unearned lease income (6,820) (10,435)
Allowance for doubtful receivables (1,294) (2,076)
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment $ 31,763 48,656
=================================================================================================================================
</TABLE>
At September 30, 1997 future lease contract payments to be received on
direct finance leases are as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
Year ending
December 31, Amount
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C>
1997 $ 6,382
1998 21,581
1999 14,914
2000 9,729
2001 and thereafter 3,545
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Future lease contract payments $ 56,151
=================================================================================================================================
</TABLE>
At September 30, 1997 certain future lease contract payments have been
assigned to financial institutions (note 5).
7
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(4) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is
as follows:
<TABLE>
<CAPTION>
===========================================================================
December 31, September 30,
1996 1997
(In thousands)
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<S> <C> <C>
Equipment under operating leases $ 430 5,221
Equipment under rental agreements 14,618 15,145
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Net book value $15,048 20,366
===========================================================================
</TABLE>
The book values presented in the above table are net of accumulated
depreciation of $6,297,000 and $8,053,000 at December 31, 1996 and
September 30, 1997, respectively.
At September 30, 1997 future contract payments to be received on
operating leases are as follows:
<TABLE>
<CAPTION>
===========================================================================
Year ending
December 31, Amount
- ---------------------------------------------------------------------------
<S> <C>
1997 $ 669
1998 1,284
1999 535
2000 207
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Future lease contract payments to be received $2,695
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</TABLE>
At September 30, 1997 certain future contract payments have been assigned to
financial institutions (note 5).
(5) Debt
Notes Payable
Notes payable to banks were as follows:
<TABLE>
<CAPTION>
============================================================================
December 31, September 30,
1996 1997
(In thousands)
- ----------------------------------------------------------------------------
<S> <C> <C>
Senior credit facility $28,000 41,100
Other 1,605 3,281
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$29,605 44,381
============================================================================
</TABLE>
At December 31, 1996 and September 30, 1997, the Company along with its
subsidiary, LINC Quantum Analytics, Inc. and its division, LINC Capital
Partners, ("the Borrowers"), had available a senior credit facility in the
amount of $35,000,000, and $75,000,000, respectively, of which $28,000,000,
and $41,100,000 at December 31, 1996 and September 30, 1997, respectively,
were outstanding. On November 12, 1997, the amount of the facility was
amended and increased to $100,000,000. As amended, the facility, provides
for interest at LIBOR plus 1-1/4% to 1-3/4% or, at the Company's option, up
to prime plus 1/4% to prime plus 1/2% with the precise rate dependent on
certain leverage tests. The facility is secured by substantially all of the
assets of the borrowers and is used by the borrowers to finance acquisition
of equipment pending completion of permanent financing
8
<PAGE>
and for normal working capital purposes. The facility matures October 31,
1998 at which point in time the remaining balance of the facility may be
converted to a term loan maturing October 31, 2000.
Recourse and Nonrecourse Debt
The Company permanently finances leases with financial institutions, on
either a nonrecourse and/or partial recourse basis. In connection with
these financings, the Company receives a cash payment equal to the
discounted value of the future rentals less, in certain cases, a holdback
or cash reserve. In the event of default by a lessee under a lease which
has been assigned to a lender under these financings, the lender has
recourse to the lessee and to the underlying leased equipment but no
recourse to the Company except to the extent of the recourse portion of the
financing.
At September 30, 1997 the future principal maturities of recourse and
nonrecourse debt are as follows:
<TABLE>
<CAPTION>
================================================================================
Year ending
December 31, Amount
- --------------------------------------------------------------------------------
(In thousands)
<S> <C>
1997 $ 2,046
1998 9,641
1999 5,336
2000 3,241
2001 and thereafter 564
- --------------------------------------------------------------------------------
Total recourse and nonrecourse discounted lease rentals $20,828
================================================================================
</TABLE>
Securitization Warehousing Facility
On November 10, 1997, the Company entered into a commitment from Fleet Bank
N.A. to provide a $60 million securitization warehousing facility to the
Company (the "Securitization Facility") which may be increased to $100
million by the Company under certain conditions. Under the terms of the
commitment, the Company will transfer lease receivables and the related
equipment to a newly formed subsidiary of the Company, LINC Receivables
Corporation, who will in turn transfer such receivables to a conduit
facility affiliated with Fleet Bank N.A.. The Securitization Facility will
provide for an interest rate which is 0.55% in excess of 30 day LIBOR and
may be converted into an amortizing term facility at any time. The terms of
the Securitization Facility will permit the securitization of substantially
all of the leases originated in the Company's Portfolio Finance & Lessor
Acquisition activities and Instrument Rental & Distribution activities as
well as the substantial majority of the leases originated in the Company's
Select Growth Leasing activities
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Income
Net income from continuing operations ("net income") for the three months
ended September 30, 1997 was $ 480,000, or $0.14 per common share compared to
$362,000, or $ 0.10 per common share for the comparable period in 1996. Net
income for the nine months ended September 30, 1997 was $1,382,000 or $0.40 per
common share compared to $ 1,099,000 or $ 0.31 per common share for the nine
months ended September 30, 1996. The increase in net income in the three months
and nine months ended September 30, 1997 compared to the earlier period is
primarily due to increased earnings contributions from the Company's Instrument
Rental activities. Income before taxes in the Company's Select Growth Leasing
and Portfolio Finance & Lessor Acquisition activities was essentially unchanged
from the prior periods. While new lease originations grew substantially,
selling, general, and administrative expenses increased as a result of building
the Company's sales and operations organization in preparation for re-initiation
of Portfolio Finance activities.
Results of Continuing Operations
Three Months ended September 30, 1997 Compared to Three Months ended
September 30, 1996
Income before taxes and minority interest for the Company's Select Growth
Leasing and Portfolio Finance & Lessor Acquisition activities for the three
months ended September 30, 1997 was $474,000 and was equal to comparable period
for 1996. Income before taxes and minority interest for the Company's
Instrument Rental & Distribution activities was $339,000 for the three months
ended September 30, 1997, compared to $ 205,000 in the earlier period.
Sales of analytical instruments increased to $5.9 million from $5.0 million
and rental and operating lease revenue increased to $1.87 million from $1.59
million primarily as a result of increase in penetration in the pharmaceutical
and biotechnology industries.
Cost of analytical instruments sold increased to $4.79 million from $3.91
million primarily as a result of the increased sale volume. However, net
margins on sales of analytical instruments declined to 18.8% from 22.1%
primarily as a result of lower gross margins on sale type leases originated in
the Company's Instrument Rental and Distribution activities during the three
months ended September 30, 1997.
Direct finance lease income increased more than doubled to $1.73 million
from $800,000 as a result of a substantially higher level of finance lease
receivables outstanding. New lease originations increased to $13.5 million from
$5.7 million.
As a consequence of the continuing decline in the number of leases serviced
by the Company for unrelated parties due to the non-compete agreement which
expired in September 1997, fee income, for the three month period, declined to
$166,000 from $441,000.
Gains on remarketing of leased equipment of $120,000 were realized in the
three months ended September 30, 1997. The increase in gains from the
comparable period in 1996 resulted from increased lease maturities in 1997.
Net selling, general and administrative expenses increased to $2.23 million
from $1.97 million primarily as a result of additional operations, marketing and
sales personnel associated with preparation for the re-initiation of portfolio
finance and lessor acquisition activities.
Interest expense increased to $1.19 million from $746,000 due primarily to
increased direct finance lease originations and the resulting increase in
borrowings.
10
<PAGE>
Depreciation of equipment, primarily depreciation of analytical
instruments, increased to $1.02 million from $888,000 as a result of increased
levels of analytical instruments held for rental, sale or lease.
The Company's policy is to provide for credit losses at the time of
commencement or acquisition of a lease. The provision for credit losses
increased to $230,000 from $138,000 reflecting the increased volume of new lease
commencements during the three-month period ended September 30, 1997.
The Company's effective tax rate increased to 41% during the three month
period ended September 30, 1997 from 38.1% in the earlier period primarily as a
result of higher goodwill amortization .
Nine Months ended September 30, 1997 Compared to Nine Months ended
September 30, 1996.
Income before taxes and minority interest for the Company's Select Growth
Leasing and Portfolio Finance & Lessor Acquisition activities for the nine
months ended September 30, 1997 was $ 1.55 million compared to $ 1.44 million in
the nine months ended September 30, 1996. Income before taxes and minority
interest for the Company's Instrument Rental & Distribution activities was
$715,000 compared to $548,000 in the earlier period.
Sales of analytical instruments increased to $16.2 from $15.0 million and
rental and operating lease revenue declined to $5.0 million from $5.4 million.
This shift in the Company's analytical instrument related revenues is primarily
as a result of increased sales to the pharmaceutical and biotechnology
industries, coupled with reduction in rentals to environmental testing
laboratories.
Cost of analytical instruments sold increased to $13.0 million from $11.9
million primarily as a result of the increased sale volume. However, net
margins on sales for the nine months ended September 30, 1997 declined to 19.4%
from 20.6 % primarily as a result of lower gross margins on sale type leases
during the nine months ended September 30, 1997.
Direct finance lease income more than doubled to $4.3 million from $2.1
million as a result of a substantially higher level of finance lease receivables
outstanding. Net investment in direct finance leases increased to $48.7 from
$27.5 million. New lease originations increased to $35.2 million from $17.3
million due to increased marketing and selling activities in the Company's
Select Growth Leasing activities.
The Company's backlog of unfunded lease commitments at September 30, 1997
was over $ 30 million compared to approximately $ 9 million at September 30,
1996, reflecting the Company's increased marketing and selling activities.
Fee income declined to $814,000 from $1.6 million, reflecting the inability
of the Company to enter into new portfolio servicing contracts as a result of
the non-compete agreement which expired at the end of September 1997. The
Company has now reinitiated its portfolio servicing marketing activities and
will securitize leases on which it will earn servicing fees in future periods.
Gains on remarketing of leased equipment of $397,000 were realized in the
nine months ended September 30, 1997 compared to $25,000 in the earlier period.
The increase in gains from the comparable period in 1996 resulted from increased
lease maturities in 1997.
During the first nine months of 1997, the Company realized $117,000 in
gains from the sale of equity participation rights compared to $45,000 in the
comparable period of 1996. This increase is attributable to the maturation of
lessees in the Company's Select Growth Leasing portfolio.
Interest and other income, which consists primarily of interest income on
secured equipment notes receivable and fees earned in connection with Select
Growth Leasing commitments increased to $1.25 million from $768.000. This was
attributable primarily to an increase in interest income associated with the
increase in interest bearing equipment notes receivable held by the Company.
11
<PAGE>
Net selling, general and administrative expenses increased to $6.20 million
from $5.68 million. This increase was due primarily to additional operations,
marketing and sales personnel associated with the growth of the Company's Select
Growth Leasing activities and preparation for the re-initiation of Portfolio
Finance & Lessor Acquisition activities.
Interest expense increased to $3.03 million from $2.05 million due
primarily to increased direct finance lease originations and the resulting
increase in borrowings. Average costs of borrowing remained essentially
unchanged. The Company has recently increased the size of its borrowing
facilities to accommodate growth in leasing activities and has significantly
lowered the interest rate on its facilities. See Liquidity and Capital
Resources.
Depreciation of equipment (primarily analytical instruments) increased
slightly primarily as a result of a small increase in the value of analytical
instruments held in inventory.
The provision for credit losses increased to $709,000 from $476,000 due to
the increase in volume of new leases originated. The Company's allowance for
doubtful receivables increased to 4.3% of net investment in direct finance
leases at September 30, 1997 from 4.1% at December 31, 1996. As the Company's
mix of leasing activities shift from its Select Growth Leasing activities to a
combination of Select Growth Leasing and Portfolio Finance activities, the
Company's allowance for doubtful receivables as a percentage of its net
investment in direct finance leases should decline over time, if the low level
of losses experienced to date were to continue. This is attributable to the
lower loss expectancy associated with the Company's Portfolio Finance activities
compared to its Select Growth Leasing activities.
The Company's effective tax rate decreased from 39.8% to 38.3% as a result
of reduction in the applicable state income tax rates in 1997 and also the
corresponding reduction in deferred tax liabilities.
Liquidity and Capital Resources
General
The Company's business activities are capital intensive and require access
to a substantial amount of credit to fund new equipment leases and analytical
instrument rental inventory. The Company has funded its operations primarily
through cash flow from operations, borrowings and the sale of equity.
On November 12, 1997, the Company consummated its initial public offering
of Common Stock through the sale of 2,000,000 shares of Common Stock (the
"Offering"). On November 19, 1997, the underwriters of the Company's offering
exercised their over allotment option and purchased an additional 300,000 shares
of Common Stock of the Company. The Company received net proceeds of
approximately $27.2 million from the Offering and the exercise of the
underwriters' over allotment option related thereto.
The Company believes that cash flow from its operations, the net proceeds
from its initial public offering, the net proceeds form future securitization
transactions and other borrowings and amounts available under its Senior Credit
Facility will be sufficient to fund the Company's operations for the forseeable
future.
Cash Flow
Cash flows from operating and financing activities relating to continuing
operations are generated primarily from receipts on leases and rentals, gross
profit on the sale of analytical instruments, realization of residual values and
the financing of new lease originations and rental inventory. Cash flows from
such activities were $37.5 for the first nine months of 1997 and $15.2 million
for the first nine months of 1996.
Credit Facilities
As of September 30, 1997, the Company had $75 million available for
borrowing under its Senior Credit Facility of which $41.1 million was
outstanding on September 30, 1997. On November 12, 1997, the amount of the
facility was amended and increased to $100,000,000. As amended, the facility,
provides for
12
<PAGE>
interest at LIBOR plus 1-1/4% to 1-3/4% or, at the Company's option, up to prime
plus 1/4% to prime plus 1/2% with the precise rate dependent on certain leverage
tests.
On November 10, 1997, the Company entered into a commitment from Fleet Bank
N.A. to provide a $60 million securitization warehousing facility to the Company
(the "Securitization Facility") which may be increased to $100 million by the
Company under certain conditions. Under the terms of the commitment, the Company
will transfer lease receivables and the related equipment to a newly formed
subsidiary of the Company, LINC Receivables Corporation, who will in turn
transfer such receivables to a conduit facility affiliated with Fleet Bank N.A..
The Securitization Facility will provide for an interest rate which is 0.55% in
excess of 30 day LIBOR and may be converted into an amortizing term facility at
any time. The terms of the Securitization Facility will permit the
securitization of substantially all of the leases originated in the Company's
Portfolio Finance & Lessor Acquisition activities and Instrument Rental &
Distribution activities as well as the substantial majority of the leases
originated in the Company's Select Growth Leasing activities
Recently Issued Accounting Pronouncements
The Company anticipates, that, in the future, it will finance or sell certain of
its equipment leases through securitization transactions or other structured
finance techniques. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" will govern the accounting
treatment of such transactions. The Company is unable to determine the precise
impact of this pronouncement on its future results of operation and financial
condition until a specific transaction occurs.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods, basic
and diluted EPS from continuing operations and basic and diluted EPS would have
been as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1997 1996 1997
------------------ -----------------
<S> <C> <C> <C> <C>
Basic EPS from continuing operations $ 0.11 $0.14 $0.33 $0.42
Diluted EPS from continuing operations 0.10 0.14 0.31 0.40
Basic EPS $(0.03) $0.04 $0.47 $0.30
Diluted EPS (0.03) 0.04 0.45 0.28
</TABLE>
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information," will affect the
disclosure requirements for the Company's 1998 financial statements. The
Company has not yet evaluated the effect of these pronouncements on its
disclosure requirements.
Note on Forward Looking Information
Certain statements in this Form 10-Q and in the future filings by the Company
with the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an
13
<PAGE>
authorized executive officer constitute "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such forward-
looking statements be subject to the safe harbors created thereby. The words
"believe", "expect" and "anticipate" and similar expressions identify forward-
looking statements. These forward-looking statements reflect the Company's
current view with respect to future events and financial performance, but are
subject to many uncertainties and factors relating to the Company's operations
and business environment which may cause the actual results of the Company to be
materially different from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties, include, but are not
limited to, the volume of new leases originated, the backlog of unfunded leases
and the adequacy of financial resources. The Company undertakes no obligation to
publicly update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
14
<PAGE>
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pro-Forma Net Income
The following table sets forth selected pro forma statement of operations data
which gives effect to (i) the application of the net proceeds from the Company's
initial public offering to repay a portion of the Company's indebtedness under
its Senior Credit Facility, (ii) the borrowing of approximately $ 4.9 million
under the Senior Credit Facility to redeem the preferred stock of a subsidiary,
(iii) the repayment by LINC Finance Corporation, a wholly owned subsidiary of
the Company which owns the Company's net assets of discontinued operations of
approximately $2 million in loans from the Company, (iv) changes in the
compensation of senior management, (v) purchase of the minority interest of
certain executives of the Company in a subsidiary of the Company, (vi)
distribution to certain stockholders of the stock of LINC Finance Corporation
and the redemption of 482,792 shares of Common Stock in connection therewith and
(vii) issuance of 2,300,000 shares of Common Stock in connection with the
Company's initial public offering.
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Nine
Months Months
Ended, Ended,
September 30, September 30,
--------------------- --------------------
1996 1997 1996 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income from continuing operations before
Income taxes and minority interest $ 679 813 1,987 2,262
Pro-forma adjustments:
Interest reduction (a) 399 410 1,357 1,392
Increase in compensation (b) (94) (282)
Increase in goodwill amortization (c) (7) (7) (22) (22)
--------------------- --------------------
Pro forma net income from continuing operations
Before income taxes $ 977 1,216 3,040 3,632
Pro forma income tax expense (399) (490) (1,240) (1,407)
-------------------------------------------
Pro forma net income from continuing operations $ 578 726 1,800 2,225
===========================================
Net income from continuing operations per
Common share $ 0.11 0.14 0.33 0.42
===========================================
Shares used in computing net income per
Common share 5,355,327 5,292,920 5,379,787 5,279,425
===========================================
</TABLE>
(a) The reduction in interest expense is attributable to the repayment of
approximately $27,200,000 under the Senior Credit Facility resulting from the
application of the net proceeds of the Company's initial public offering and
approximately $2 million from repayment of advances by LINC Finance
Corporation, net of borrowing incurred to redeem the preferred stock of a
subsidiary ($4.9 million) and to purchase certain executives' minority interests
in a subsidiary of the Company ($1.2 million in 1996 and $800,000 in 1997).
The interest expense reduction is calculated as the net reduction in borrowing
multiplied by the Company's weighted average interest rate under the Senior
Credit Facility for the applicable period.
(b) Changes in compensation are attributable to the employment of certain
executives for the third quarter of 1996 and the nine months ended September
30, 1996 at the compensation levels provided for in agreements entered into
between the Company and such executives simultaneously with completion of the
initial public offering.
(c) The increase in goodwill amortization is attributable to goodwill created as
a result of the Company's purchase of certain executives' minority interests in
a subsidiary.
15
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 --Computation of earnings per common share
27 --Financial Data Schedule for the three months ended September 30,
1997
</TABLE>
(b) REPORTS ON FORM 8-K
- --No reports on form 8-K were required to be filed during the period September
30, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINC Capital, Inc.
------------------
(Registrant)
December 9, 1997 /s/ MARTIN E. ZIMMERMAN
- -------------------- ----------------------------------------
Date Chairman and Chief Executive Officer
(Principal Executive Officer)
December 9, 1997 /s/ ALLEN P. PALLES
- -------------------- ----------------------------------------
Date Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
17
<PAGE>
Exhibit 11
LINC Capital, Inc. and Subsidiaries
Computation of earnings per share
(in thousands except per share data)
Average shares used in computing earnings per common and common equivalent share
were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average shares outstanding 3,404,255 3,394,565 3,404,255 3,380,202
Effect of dilutive option 170,554 147,050 170,554 147,050
Treasury stock (36,690) (65,903) (12,230) (65,035)
--------- --------- --------- ---------
3,538,119 3,475,712 3,562,579 3,462,217
========= ========= ========= =========
Net income from continuing operations $ 362 480 1,099 1,382
Discontinued operations
Income (loss) from discontinued
operations, net of income tax (benefit) (229) (347) (1,012) (402)
Net gain (loss) from disposal of discontinued
operations, net of income tax (benefit) (245) - 1,513 -
--------- --------- --------- ---------
Net income (loss) $ (112) 133 1,600 980
========= ========= ========= =========
Per common share
Net income from continuing operations $ 0.10 0.14 0.31 0.40
Discontinued operations
Income (loss) from discontinued
operations, net of income tax (benefit) (0.06) (0.10) (0.28) (0.12)
Net gain (loss) from disposal of discontinued
operations, net of income tax (benefit) (0.07) - 0.42 -
--------- --------- --------- ---------
Net income (loss) $ (0.03) 0.04 0.45 0.28
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 1,677
<RECEIVABLES> 10,875
<ALLOWANCES> 2,076
<INVENTORY> 133
<CURRENT-ASSETS> 11,128
<PP&E> 760
<DEPRECIATION> 8,053
<TOTAL-ASSETS> 91,883
<CURRENT-LIABILITIES> 7,894
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 14,009
<TOTAL-LIABILITY-AND-EQUITY> 91,883
<SALES> 16,152
<TOTAL-REVENUES> 15,079
<CGS> 13,013
<TOTAL-COSTS> 13,013
<OTHER-EXPENSES> 12,817
<LOSS-PROVISION> 709
<INTEREST-EXPENSE> 3,032
<INCOME-PRETAX> 2,262
<INCOME-TAX> 867
<INCOME-CONTINUING> 1,382
<DISCONTINUED> (402)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 980
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
</TABLE>
